Cohu, Inc. (NASDAQ:COHU): Navigating Through the Semiconductor Cycle with Resilient Recurring Revenue

Cohu, Inc. (NASDAQ:COHU) is a global technology leader supplying test, automation, inspection and metrology products and services to the semiconductor industry. The company's differentiated and broad product portfolio enables optimized yield and productivity, accelerating customers' manufacturing time-to-market.

Financials

In fiscal year 2023, Cohu reported annual net income of $28,156,000, annual revenue of $636,322,000, annual operating cash flow of $101,470,000, and annual free cash flow of $85,417,000. The company's recurring revenue, which is largely consumable-driven and more stable than systems revenue, represented 66% of total revenue in the first quarter of fiscal 2024.

For the first quarter of fiscal 2024, Cohu reported revenue of $107.6 million, down 40.0% from the prior year period. The decline was due to lower demand across automotive, industrial, mobile (including 5G-related products) and computing semiconductor applications. Gross margin for the quarter was 45.8%, compared to 48.1% in the prior year period, as lower business volume impacted the company's ability to leverage fixed costs.

Research and development (R&D) expense was $22.3 million, or 20.8% of net sales, compared to $22.5 million, or 12.5% of net sales, in the prior year period. The decrease in R&D expense was due to lower spending on material costs associated with product development. Selling, general and administrative (SG&A) expense was $35.1 million, or 32.6% of net sales, compared to $34.2 million, or 19.1% of net sales, in the prior year period. The increase in SG&A expense as a percentage of net sales was primarily a result of lower sales in the current quarter.

Cohu reported a net loss of $14.6 million, or $0.31 per share, in the first quarter of fiscal 2024, compared to net income of $15.7 million, or $0.33 per share, in the prior year period. The company's effective tax rate for the quarter was negative due to the impact of a valuation allowance against deferred tax assets in the U.S.

Liquidity

On the balance sheet, Cohu ended the first quarter with $271.3 million in cash, cash equivalents and short-term investments, down from $335.7 million at the end of fiscal 2023. The decrease was primarily due to $29.3 million used to pay off the remaining term loan balance, $11.0 million for share repurchases, and $14.0 million in net cash used in operating activities. Capital expenditures in the quarter were $3.3 million, with approximately $2 million related to the company's factories in the Philippines and Malaysia.

Outlook

For the second quarter of fiscal 2024, Cohu is guiding revenue in the range of $105 million, plus or minus $6 million, reflecting continued weakness across end markets and low test cell utilization at customers' production facilities. Gross margin is forecasted to be approximately 45%, better than the company's financial target model at this level of revenue due in large part to Cohu's differentiated products and stable high-margin recurring business. Operating expenses are projected to decrease to approximately $48.5 million, down from $50.2 million in the first quarter, due primarily to a reduction in force and other optimization efforts. Adjusted EBITDA is expected to be approximately 2% in the second quarter.

Business Overview

Cohu's long-term market drivers and strategy remain intact, as the company continues to focus on building a well-balanced and resilient business model. The company is encouraged by increased use of semiconductors, including the most recent developments in Artificial Intelligence (AI), along with customer traction with new products. Cohu continues to capture new customers and remains optimistic about the long-term prospects for its business due to the increasing ubiquity of semiconductors, increasing semiconductor complexity, increasing quality demands from semiconductor customers, increasing test intensity and continued proliferation of electronics in a variety of products across the automotive, mobile, industrial, computing, and consumer markets.

The company's recurring revenue, which represented 66% of total revenue in the first quarter, provides a more stable revenue stream and adds resilience to profitability through industry cycles. Cohu's recurring revenue has delivered $304 million over the last 12 months with a 3-year compound growth rate of 2.7%. The company's installed base of approximately 24,700 systems worldwide supports this recurring revenue stream.

Geographic Distribution

Geographically, Cohu generated 15.7% of its first quarter revenue from Malaysia, 13.6% from the United States, 11.2% from Singapore, 11.0% from the Philippines, 10.9% from China, and 37.6% from the rest of the world. The company has a global footprint with manufacturing and service operations in multiple countries to support its diverse customer base.

Product Portfolio

From a product perspective, Cohu's revenue is diversified across systems (34.7% of Q1 revenue) and non-systems (65.3% of Q1 revenue), which include spares, contactors, and kits. The company has been successful in diversifying its revenue streams beyond its core tester business, including wins in the MEMS, optoelectronics, and display driver IC markets.

Conclusion

Looking ahead, Cohu remains focused on managing cash flow while continuing to execute critical new product developments and customer design win initiatives to enable growth when customers resume capacity expansions. The company's strong balance sheet and liquidity position provide the financial flexibility to invest in growth opportunities and return capital to shareholders through its share repurchase program.

Overall, Cohu is navigating through the current semiconductor cycle by leveraging its resilient recurring revenue stream, diversified product portfolio, and global operational footprint. The company's long-term market drivers and strategy remain intact, positioning it well to capitalize on the increasing demand for semiconductors across a variety of end markets.